Monetary Policy in Times of Debt

39 Pages Posted: 9 Nov 2017

Date Written: October 25, 2017

Abstract

We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.

Keywords: Long-Term Mortgages, Monetary Policy, Income Channel

JEL Classification: E52, E58, G21

Suggested Citation

Pietrunti, Mario and Signoretti, Federico Maria, Monetary Policy in Times of Debt (October 25, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1142, Available at SSRN: https://ssrn.com/abstract=3066686 or http://dx.doi.org/10.2139/ssrn.3066686

Mario Pietrunti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Federico Maria Signoretti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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